Obama Administration Wants To Require Venture Capital Funds To Register With The SEC

The Obama Administration is continuing (see prior blog entry re this) to propose that venture capital firms be required to register with the SEC. In general, under current law, most venture capital firms are not required to register with the SEC as investment advisors. Requiring registration would impose additional costs and burdens on the venture capital industry, and would probably crimp industry participation to some degree, and slow down the flow of capital to and through funds to startup companies.

The Obama Administration also wants to subject venture capital funds “carried interest” to tax at ordinary income tax rates and self-employment taxes. For information on this, see here.

The below quoted material is from the Obama Administration’s Financial Regulatory Reform proposal. See also this article from the Wall Street Journal. See also this article. Also see this bill introduced which would set the threshold for mandatory SEC registration of venture funds at $30 million. Finally, see John Cook’s article here.

“F. Require Hedge Funds and Other Private Pools of Capital to Register

All advisers to hedge funds (and other private pools of capital, including private equity funds and venture capital funds) whose assets under management exceed some modest threshold should be required to register with the SEC under the Investment Advisers Act. The advisers should be required to report information on the funds they manage that is sufficient to assess whether any fund poses a threat to financial stability.

In recent years, the United States has seen explosive growth in a variety of privately owned investment funds, including hedge funds, private equity funds, and venture capital funds. Although some private investment funds that trade commodity derivatives must register with the CFTC, and many funds register voluntarily with the SEC, U.S. law generally does not require such funds to register with a federal financial regulator. At various points in the financial crisis, de-leveraging by hedge funds contributed to the strain on financial markets. Since these funds were not required to register with regulators, however, the government lacked reliable, comprehensive data with which to assess this sort of market activity. In addition to the need to gather information in order to assess potential systemic implications of the activity of hedge funds and other private
pools of capital, it has also become clear that there is a compelling investor protection rationale to fill the gaps in the regulation of investment advisors and the funds that they manage.

Requiring the SEC registration of investment advisers to hedge funds and other private pools of capital would allow data to be collected that would permit an informed assessment of how such funds are changing over time and whether any such funds have become so large, leveraged, or interconnected that they require regulation for financial stability purposes.

We further propose that all investment funds advised by an SEC-registered investment adviser should be subject to recordkeeping requirements; requirements with respect to disclosures to investors, creditors, and counterparties; and regulatory reporting requirements. The SEC should conduct regular, periodic examinations of such funds to monitor compliance with these requirements. Some of those requirements may vary across the different types of private pools. The regulatory reporting requirements for such funds should require reporting on a confidential basis of the amount of assets under management, borrowings, off-balance sheet exposures, and other information necessary to assess whether the fund or fund family is so large, highly leveraged, or interconnected that it poses a threat to financial stability. The SEC should share the reports that it receives from the funds with the Federal Reserve. The Federal Reserve should determine whether any of the funds or fund families meets the Tier 1 FHC criteria. If so, those funds should be supervised and regulated as Tier 1 FHCs.”

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About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.

3 Responses to "Obama Administration Wants To Require Venture Capital Funds To Register With The SEC"

Joe, you may be right, of course, about the ill effects of regulation of VCs on startups, because we don’t have any regulations yet to know for sure: but I think the industry should, to quote Brad Hefta-Gaub, “shift their focus from resisting to shaping the regulation.” Requiring VCs to make disclosures as investment advisers, which they surely are, is not tantamount to regulating their invested companies. There is danger and there is opportunity, too, that could be bad or good for startups. Rather than tell the government that the whole industry is relatively insignificant (“no systemic risk”), might the NVCA instead educate the Treasury and legislators about the pitfalls of applying valuation requirements on portfolios?

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